Market Insights: April 21, 2014
Economic Outlook: Housing, Jobs & Inflation…
- The strong finish for economic data at the end of the first quarter continues to become “official”.
- U.S. housing starts for March rose by 2.8% and are now running at a 950,000 annualized pace. While this is considerably below the peak numbers we became accustomed to before 2007, it nonetheless confirms stabilization in the housing market. It is clearly a recovery from the more recent lower numbers that were impacted by cold winter weather.
- Whether the housing start numbers can maintain momentum will be the next thing to watch. Mortgage rates have risen about 100 basis points in the last year, so with firmer prices, affordability is somewhat tougher than what was the case 12 months ago.
- The key for housing’s momentum will be continued strength on the jobs front. There was actually an article in USA today last Friday which reported an increase in the number of companies hiring college graduates directly out of school. This is anecdotal evidence confirming that corporations are more amenable to boosting employment if they can find qualified applicants.
- Corporations are getting more in the hiring mood because the demand is solid, even if not robust. Industrial Production remains positive coming out of winter weather, and showed a month-to-month gain of 0.7% in March [Federal Reserve Board].
- Last week, Retail Sales showed a nice spring rebound in March, increasing 1.1% month to month [Department of Commerce].
- The Philadelphia Fed Survey just released shows that manufacturing sector is picking up steam with a reading of 16.6, after falling into negative territory due to weather [Federal Reserve Bank of Philadelphia].
- The official U.S. inflation statistics have begun to firm. The increase in the CPI measurement for the services sector is now up 2.7% on a twelve-month trailing basis. We have not seen this degree of increase in services for more than four years. Keep in mind that the service sector is labor-intensive. During the period between 2003 and 2008, this year-over-year change in service sector CPI was typically 3.0% to 4.5% per year. Maybe we will see those days again.
- First quarter GDP from China came in at a 7.4% gain over the trailing 12 months. This was just slightly better than expectations. Chinese retail sales were also strong, up 12% over the same level from a year ago.
- In our view, the recent data from China seems to confirm that while growth has slowed, there’s not a hard landing. This should provide some foundation of support for emerging economies which are more resource sensitive and depend on the growth rate in China.
Equities Outlook: A good week for global equities…
- The short week last was a good one for the equity markets, both in the U.S. and around the world. All major indices were up over 1.0% led by the MSCI Japan at + 2.6%.
- We have remarked a number of times in past months about the very low inflation in Europe. This has the attention of banking authorities. Even the German Bundesbank has indicated it would favor more aggressive stimulus.
- More stimulus by European central bankers would be a definite positive for European stocks. Valuations in Europe remain attractive on a relative basis compared to their U.S. counterparts.
- Emerging market stocks have found some needed stability during the first quarter. This sector is a case of where every country is not alike. The problems of China are different from those of Brazil. At present, Eastern Europe and Russia are subject to geopolitical factors. India has bounced off its lows established last year, and shows some signs of an increasing pro-business attitude. Selectivity is the key to investing in emerging markets.
The Fed and Fixed Income Markets: Sector selection and duration management…
- The Ten-Year Treasury firmed in yield during the holiday-shortened week. At week’s end, it closed at a yield of 2.72%, an increase of 10 basis points over the previous week.
- In a speech last Wednesday, Janet Yellen stated that an eventual increase in policy rates will not be based on a single indicator. Yellen’s comments can be considered dovish. The Fed will likely continue in deliberate steps to wind down the bond purchase program. The first increase in the fed funds rate likely is no sooner than 2015.
- The municipal bond market has rallied during the first quarter of 2014. This is likely attributable to some clarity coming to the market regarding the troubled credits like Detroit and Puerto Rico.
- At the moment, it is the longer maturity municipal bonds which continue to be cheap in comparison to comparable taxable bonds. At these longer maturities is possible to invest in the highest grade tax-free bonds and yet obtain yields that are in excess of the yield on the 30-year taxable U.S. Treasury Bond.
- We continue to see this bond market as one where the key is sector selection and duration management. These will likely trump credit considerations.
The Week Ahead: A lot of data coming down…
- Leading Indicators (Conference Board), [U.S.]
- Existing Home Sales (National Association of Realtors), [U.S.]
- New Home Sales (Census, Dept of Commerce, HUD), [U.S.]
- Durable Goods Orders (Census, Dept of Commerce), [U.S.]
- Consumer Sentiment (University of Michigan), [U.S.]